Real estate tax: Between validity and objection

CAIRO –11 August 2018: The state has been running a campaign encouraging citizens to submit real estate tax declarations before Aug. 15. The campaign was faced with resentment by many citizens who have been confused about how it is calculated, exemptions, and penalties.

The confusion stems from the fact that Egypt has not almost had such a type of tax as owners of commercial units used to pay a tiny amount of cash every year. The new bill imposes tax on residential units above a certain value as well as any units that are finished but not occupied.

Tax Consultant Yasser Maharem says that real estate tax has been adopted in Egypt since 1847, and that amendments took place in 1954 and 2008. However, the last bill was not activated until2013. In 2017, President Abdel Fatah al-Sisi endorsed the bill and it was activated.

Tax Calculation and Exemptions

The units are divided into four categories. Units that are finished and occupied, units that are finished and non-occupied, units that are unfinished but occupied such as units rented like garages or storehouses, and units that are unfinished and unoccupied. All have to pay except for the last. Finished means having facilities introduced. Also, the tax applies to lands used for commercial purposes such as parking lots but not to agricultural lands.

Residential units below the value of LE2 million ($112,360) are exempted; however, more expensive units can enjoy an exemption of LE 2 million out of the total value. Citizens who own more than one unit can receive an exemption on one unit they choose,which would be the cheapest one, and below LE2 million.

The tax value is 10 percent of the net rental value which is calculated as 3 percent of the capital value representing 60 percent of the market value that is evaluated by a central committee on the basis of the unit’s surface area and meter prices in the neighborhood. Evaluations take place every five years.

The net rental value is calculated by discounting 30 and 32 percent off rental value for residential and commercial units respectively as maintenance fees. The maximum increases every five years is 30 percent and 45 percent for residential and commercial units respectively. For commercial units, the maximum net rental value entitled for exemption is LE 1,200 ($67.4) per annum.

Tax Expert Mahmoud Gab Allah clarifies that the rental value is the base to set taxes using contracts, so when there is no contract, authorities must resort to such calculations because imposing taxes based on asset value is unconstitutional.

The tax is paid annually and it is calculated per unit so that owners of buildings divided into units or flats would not be taxed for the whole construction. Thus, adding new floors should be reported by December of the same year constructions are finished. Units that have damages inhibiting occupancy are exempted. Public and religious properties are excluded from the tax.

Citizens who own more than one unit would have to seek tax authority bureaus in different neighborhoods and governorates. Former owners are not approached by the authority, although it is their duty to pay taxes before they sell.

Penalty

Not submitting the declaration or providing false information incurs a fine between LE 200 ($11.2) and LE 2,000 ($112.2). Further, tax evasion results in halting the ability to sell or rent the units.

Not abiding by the deadline to pay the tax incurs a two percent fine in addition to interest rates set by the Central Bank of Egypt (CBE), currently at 17 percent, for every month, Accounting and Tax Professor at Shorouk Academy Nabil Abdel Raouf reveals. However, the tax drops five years after the citizen is notified, Abdel Raouf explains.

The new law may also be a way to combat tax evasion. Gab Allah says that an income tax on rentals is collected, if the owner reports to the Egyptian Real Estate Taxation Authority. This is not very common in Egypt, especially with residential units. Maharem adds that the real estate tax is deducted from income tax on property, if the latter is applicable.

Objections

The real estate taxes authority announced that its revenues had reached LE3 billion ($168,500), while 385,000 citizens made petitions. Commenting on protests over taxing units that are not used for renting, Gab Allah explains that expensive units derived their value from facilities provided by the state.

Gab Allah also reveals that chalets in North Coast used to be exempted as previous laws imposed the tax on buildings within urban conglomerations only while those were located beyond those.

Maharem says that the rationale behind such tax is that it is put on a real estate wealth whose value rises by time. However, Gab Allah clarifies that units subject to old renting law would not be subject to the new tax regulations as the revenues raised are very low.

Heads of industrial zones in Upper Egypt objected the tax and demanded exemptions because of overestimating meter prices and calculating the entire factories’ area and not just the building areas, representing around six percent of the total area.

Abdel Raouf agrees that real estate tax exemption should be endorsed for factories in order to encourage investment, while Maharem and Gab Allah disagree saying that factories used to pay real estate taxes in accordance with the 1956 law.

Answering how property owners would benefit of such tax, Gab Allah says that the bill allocates 25 percent of real estate tax revenues to municipal authorities in order to enhance and maintain facilities at all neighborhoods.

The new system is the same as France’s, the only difference is that a residence tax is paid by tenants in France. On the other hand, the United Kingdom has only rental tax up to 40 percent. In neighboring United Arab Emirates (UAE), tenants pay once five percent and 10 percent of the contract’s value for residential and commercial units respectively while owners do not pay anything.

The 2018/2019 budget aims to record a budget deficit of 8.4 percent, or LE 438.58 billion ($24.6 billion), down from 9.7 percent in the previous year. The revenues are projected to reach a total of LE 989.2 billion including taxes and tariff yields estimated at LE 770.3 billion. Expenditures would record a total of LE 1.41 trillion. Egypt has a huge informal sector constituting a big factor behind tax evasion estimated at 50 percent.